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Ch.6_notes - CHAPTER 6 INTERCOMPANY TRANSACTIONS –...

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CHAPTER 6 INTERCOMPANY TRANSACTIONS – PROPERTY, PLANT & EQUIPMENT I. EQUIPMENT (UPSTREAM SALE) A. Year of Sale The following information summarizes the relation and transactions between P Company and its 90% owned subsidiary, S Company, during 20X2. 1. On January 1, 20X2, S Company sells to P Company equipment with a book value of $750,000 (original cost $1,350,000 and accumulated depreciation of $600,000) for $900,000. 2. On the date of sale, the equipment has an estimated remaining useful life of three years, no residual value, and is depreciated using the straight-line method. 3. No other equipment is owned by S Company or P Company. Journal Entries Books of P Company Equipment 900,000 Cash 900,000 Dep. Expense 300,000 Accum. Dep. 300,000 Books of S Company Cash 900,000 Accum. Dep. 600,000 Equipment 1,350,000 Gain on Equip. 150,000 Consolidation Working Papers P Company and Subsidiary for year ended 12/31/20X2 Income State. P Company S Company Debit Credit Consol. Gain on Equipment --- 150,000 a 150,000 -0- Depreciation Expense 300,000 --- b 50,000 250,000 Balance Sheet 1
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Equipment 900,000 --- a 150,000 750,000 Accumulated Depreciation 300,000 --- b 50,000 250,000 (a) To eliminate unrealized gain on inter-company sale of equipment. (b) To realize 1/3 of gain on inter-company sale of equipment. Entries on Books of Company P: Equity Method To defer unrealized gain of inter-company sale of equipment: INCOME FROM S 135,000 INVESTMENT IN S COMPANY 135,000 To realize 1/3 of gain on inter-company sale of equipment: INVESTMENT IN S COMPANY 45,000 INCOME FROM S 45,000 B. Year Subsequent to Sale Assume that during 2003, there were no inter-company sales of equipment between P Company and S Company. Journal Entries P Company 12/31/03 Depreciation Expense 300,000 Accumulated Depreciation 300,000 Consolidation Working Papers P Company and Subsidiary for year ended 12/31/20X3 Income State. P Company S Company Debit Credit Consol. Depreciation Expense 300,000 --- b 50,000 250,000 Balance Sheet Equipment 900,000 --- a 150,000 750,000 Accumulated Depreciation 600,000 --- b 50,000 a 50,000 500,000 Investment in S Company xxx a 90,000 2
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Minority Interest a 10,000 (a) To adjust the cost of the equipment to its B-O-P book value and to establish reciprocity between the Investment account and the equity of S Company (b) To realize 1/3 of gain on inter-company sale of equipment.
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